Welcome everyone to CTBC Financial Holding Company's 2022 first quarter earnings conference call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question and answer session. Please follow the instructions given at the time if you would like to ask the question. Today's host will be Ms. Ya-Ling Chiu, CFO and spokesperson of CTBC Financial Holding Company, and Mr. Pai-Hung Yeh, Executive Vice President of Taiwan Life Insurance Company, and the presentation will begin now.
Thank you everyone for joining CTBC first quarter 2022 earnings call. Please turn to page four on financial highlights. CTBC Holding continued to deliver solid financial results, with ROE and ROA at 16.5% and 0.93% respectively. EPS was TWD 0.84. After-tax profit was down 17% year-over-year, reflecting fluctuations in capital markets, while underlying core business remained resilient. Holding remained well capitalized with CAR at 136.2% and double leverage ratio at 116.2%. CTBC Bank observed growth momentum in its core business, with net interest income up 16% year-over-year, supported by strong lending growth and widened net interest margins. Growth in credit cards, retail, corporate, and lottery fees offset lower wealth management fees. Credit costs remained sound at 15 basis points. Capitalization remained sound, with CAR at 14.7% and CET1 ratio at 11.6%. Taiwan Life after-tax profit was down 11% year-over-year due to moderated investment gains, but benefited from hedging gains.
Taiwan Life continued to focus on protection type and foreign currency policy and was ranked number five in the industry by first-year premium. RBC ratio remained sound at 335%. Page five on profitability. Holding's first quarter net income was TWD 16.3 billion. EPS was TWD 0.84. Group ROE was 16.5% and ROA was 0.93%. Page six on capital ratio. We remain well capitalized with group CAR at 136.2%, Life RBC ratio at 335%, Bank CAR at 14.7%, and CET1 ratio at 11.6%. Page seven on profit breakdown by entity. In 1Q, bank net profit reached TWD 7.4 billion, down 7% year-over-year, as increased net interest income was offset by higher provisions and tax expense. Life net profit was down 11% due to moderated investment gains on base effect. Holding consolidated net profit was TWD 16.3 billion, down 17% year-over-year.
In terms of profit breakdown, Life and Bank contributed 57% and 46% to 1Q earnings respectively. Page eight on net profit movements. In the chart above, operating revenue was down 3% quarter-over-quarter, as growth in net interest income and fee income was offset by lower trading gains at securities and investment trust subsidiaries. In addition, the bank booked disposal gains on collaterals and bargain purchase gains in 4Q last year and higher lottery rebates to MOF in 1Q this year. Provisions decreased mostly due to lower specific provisions. Credit costs for 1Q was 15 basis points, down 31 basis points quarter-over-quarter. Expense was down 4% quarter-over-quarter. As for Life, 1Q pre-tax profit increased mostly due to increased investment gains and hedging gains. On the bottom, operating revenue was flat year-over-year as loan growth and widened net interest margin underpinned increase in net interest income.
Trading income decreased amid volatile capital markets. Provisions were up 21% year-over-year due to higher specific provisions overseas and impact from LH. Expense was up 3% year-over-year. Life pre-tax profit was down 6% year-over-year on moderated investment gains. Holdings' pre-tax profit reached TWD 21 billion, down 7% year-over-year. Holding adopted alternative minimum tax in 1 Q, resulting higher taxable income and tax expense. Overall, Holdings net income reached TWD 16.3 billion, down 17% year-over-year. Page nine on revenue breakdown excluding Life. Total revenue was down 3% quarter-over-quarter and flat year-over-year. Net interest income was up 4% quarter-over-quarter as loans and marketable securities grew and net interest margin improved due to favorable NT dollar loan mix and higher yields on marketable securities benefiting from rate hikes. Net interest income was up 16% year-over-year, driven by loan growth and favorable changes in loan and deposit mix.
Fee income was up 9% quarter-over-quarter, driven by better corporate and lottery fees. Fee income was down 4% year-over-year as volatility in capital markets led wealth management fees lower, while corporate credit card, lottery, and investment trust fees increased. Combined derivative FX and trading gains was down 22% quarter-over-quarter, as higher trading income from FX and interest rate related products was offset by lower trading income at securities and venture capital subsidiaries. Combined derivative FX and trading gains was down 51% year-over-year due to lower trading income from bond and equity investment. Long-term investment and other income declined quarter-over-quarter due to recognition of disposal gains on collaterals and bargain purchase gains in 4 Q last year, and higher lottery rebates to MOF in 1 Q this year.
Long-term investment and other income was down 16% year-over-year as the bank no longer books long-term investment income from LH after consolidating the entity. Page 11 on banks loan breakdown. Total lending with credit card revolving was up 3% quarter-over-quarter and 11% year-over-year. NT dollar corporate loan was up 3% quarter-over-quarter, driven by higher investment demands from corporate and growth in government related loans. NT dollar corporate loan was up 7% year-over-year, driven by higher investment demands from corporate and growth in government related commerce and services and construction and real estate sectors. Foreign currency loan was up 4% quarter-over-quarter and 15% year-over-year. Excluding FX, foreign currency loan was up 19% year-over-year. Mortgage was up 3% quarter-over-quarter and 10% year-over-year as transaction volumes in property market continued to grow.
Other loans were up 1% quarter-over-quarter and 13% year-over-year, mostly on growth in unsecured consumer loans, as we continued to expand our customer base and participated in the labor relief program led by the government last year. Page 12 on foreign currency loan breakdown. Foreign currency loan accounted for 38% of total lending. Overseas subsidiaries accounted for 59% of foreign currency loans, with TSB and LH being two larger subsidiaries. Overseas branches accounted for 30%. OBU plus DBU was 12%. Looking at the foreign currency loan breakdown by region, Japan accounted for 34% of foreign currency loans, Southeast Asia 27%, Greater China 15%, and North America 13%. Overseas subsidiaries loan was up 21% year-over-year, driven by the consolidation of LH and rising business momentum at U.S., Indonesia, and Philippines subsidiaries reporting double digit loan growth. Excluding FX, overseas subsidiaries loan was up 27%.
Excluding the impact from FX and LH, overseas subsidiaries loan was down 2%, mostly due to the adjustment of lending policy at TSB. Excluding FX, overseas branch loan was up 9%, as most overseas branches observed loan growth momentum to pick up except Singapore and Vietnam branch. Hong Kong, New York, and India branches reported double digit growth. OBU plus DBU was up 7% year-over-year, driven by growth in trade finance and syndicated loans. Page 13 on bank deposit mix. Total deposits reached TWD 4.1 trillion, flat quarter-over-quarter and up 9% year-over-year. On the right, total anti-dollar deposits were up 1% quarter-over-quarter and 8% year-over-year. Anti-dollar savings accounted for 64%. Total foreign currency deposits were down 1% quarter-over-quarter and up 9% year-over-year. Foreign currency savings accounted for 59%. Page 14 on loan-to-deposit ratio. Overall, LDR was 70.7%. Anti-dollar LDR was 76.6%. Foreign currency LDR was 62.6%.
Page 15 on NIM and spread. In 1Q, foreign currency spread was 2.41%, up seven basis points quarter-over-quarter, due to the consolidation of LH and foreign currency loan growth. Anti-dollar spread was 1.57%, up four basis points quarter-over-quarter, driven by loan growth and favorable loan mix. Overall spread was 1.89%, up six basis points quarter-over-quarter. In addition, rate hikes led higher yields for marketable securities. 1Q NIM was up four basis points quarter-over-quarter at 1.47%. Excluding impact from LH, NIM was 1.43%, up three basis points quarter-over-quarter. Page 16 on fee breakdown. Total fees were up 10% quarter-over-quarter and down 4% year-over-year. Whilst management fee was down 14% quarter-over-quarter and 18% year-over-year, as fluctuations in capital markets impacted customer demands and caused sales of bank insurance and mutual funds to weaken.
Credit card fee was up 1% quarter-over-quarter and 4% year-over-year due to recovered consumptions supported by higher spending on gas, online shopping, restaurant, and department stores. Retail business was up 1% quarter-over-quarter and 4% year-over-year as retail business growth triggered increase in fees. Corporate business was up 13% quarter-over-quarter and 35% year-over-year, driven by syndicated loan and trust fees. Overseas subsidiaries fee was down 1% quarter-over-quarter, as corporate and retail-related fees decreased at TSB, and up 5% year-over-year, mostly due to the consolidation of LH. Lottery fee was up quarter-over-quarter and year-over-year due to seasonal Chinese New Year effect. Page 17 on wealth management fee. For wealth management fee breakdown, bancassurance contributed 65%, mutual fund 24%, custodian and trust 3%, and others 8% to total wealth management fees. Page 18 on cost income ratio.
Bank operating revenue was flat quarter-over-quarter while operating expense was up 2% quarter-over-quarter, mostly due to higher ESOP valuations, leading to cost income ratio at 61% in 1Q. Cost income ratio was relatively stable compared to the same period last year. Page 19 on asset quality. NPL ratio was 0.55%, and NPL coverage ratio was 300%. Excluding impact from LH, NPL ratio was 0.41%, and NPL coverage ratio was 353%. 1Q credit cost was 15 basis points, down 31 basis points quarter-over-quarter on higher specific provisions and consolidation of LH in 4Q last year. Compared to the same period last year, 1Q credit cost was up one basis point year-over-year due to higher specific provisions overseas and impact from LH. Excluding impact from LH, 1Q credit cost would be 10 basis points. Moving on to life business. Page 21 on total premium and first-year premium.
Total premiums were TWD 42.6 billion in 1 Q, down 15% quarter-over-quarter and 22% year-over-year. FYPs for TWD 22.4 billion, up 1% quarter-over-quarter and down 28% year-over-year as volatile capital markets affected sales of investment-linked products and customers turned to interest-sensitive policies that capture rate hike trend. Page 22 on FYP breakdown by products and channels. On the left is the product breakdown. Investment-linked products accounted for 22%, interest-sensitive policies 74%, health and PA 3%, and traditional 1% of FYPs. On the right, in terms of channels, 53% of FYPs came from CTBC Bank, 33% from external banks, 8% from tied agents, and 6% from insurance brokers and others. Page 23 on FYP breakdown by type of payment and currencies. On the left, single-pay products accounted for 48%, and regular pay products accounted for 30% of FYP.
On the right, investment-linked products accounted for 22%, foreign currency policy 71%, and NT dollar policy 7% of FYPs. Page 24 on FYPE. 1 Q FYPE was TWD 5.1 billion. On the right is the FYPE mix for your reference. Page 25 on investment asset mix. Total investment assets reached TWD 2 trillion.
Taiwan Life took suitable opportunities to realize gains in 1 Q and increase its cash holding and equities position. In terms of portfolio breakdown, cash accounted for 6.8%, domestic fixed income 9.9%, overseas fixed income 58.4%, equities 9.7%, mortgage 1.7%, policy loans 1.2%, real estate 4.4%, and mutual funds 7.9%. Pre-hedge returns for each type of investment assets are as follows, cash, 0.18%, domestic fixed income 1.75%, overseas fixed income 4.77%, equities 6.24%, mortgage 2.08%, policy loans 4.71%, real estate 0.64%, as part of the real estate project construction work is underway, and the return for mutual fund is 10.55%.
Page 26 on investment yield, cost of liability, and break-even point. In 1 Q, Taiwan Life still maintains positive investment spread. Overall investment yield after hedge was 4.94%. Recurring yield before hedge was 2.94%. Cost of liability marginally increased one basis point year-over-year to 3.06%, reflecting great policies. Break-even point continued to improve at 2.68%. Page 27 on hedging mix. On the left, 42% of overseas investment assets were foreign currency policies, 35% were fully hedged. 9% were OCI position and 14% were unhedged. On the right, FX reserve amounted to TWD 7 billion as of 1Q . NT dollar depreciation resulted hedging gains of 49 basis points in 1Q . Overall hedging costs declined 180 basis points year-over-year from the same period last year. Next, we move on to Taiwan Life and 2021 EV report. Page 29 on EV.
EV reached TWD 257.7 billion, of which adjusted net worth was TWD 123.4 billion. Value of in-force business before cost of capital was TWD 146.2 billion, and the cost of capital was TWD 44.2 billion. EV is TWD 41.4 per Taiwan Life share and TWD 13.2 per CTBC Holding share. Page 30 on EV assumptions. Investment yield for NT dollar policies starts from 3.64% in 2022 and will gradually rise to 4.07% in 2041. Investment yield for US dollar policies starts from 4.1% in 2022 and will gradually rise to 5.14% in 2041.
Discount rate applied was 10%. RBC capital requirement remained at 200%. PwC has provided an independent review on EV assumptions. Page 31 is EV sensitivity for your reference. Page 32 on EV comparison. EV increased by TWD 32.3 billion year-over-year. The suggested net worth increased by TWD 40.9 billion and VIF increased by TWD 9.7 billion. Page 33 on adjusted net worth movement.
Adjusted net worth increased to TWD 164.3 billion, mainly due to profit of TWD 23.1 billion. Changes in unrealized gains on financial assets of TWD 14 billion, and changes in unrealized gains from property of TWD 4 billion. Page 34 on VIF movement. The increase in VIF was mainly driven by business growth. The VIF movement was due to VNB of TWD 8.4 billion, plus release of 2021 expected profits and interest rolling forward of TWD 1.8 billion. Investment yield assumption change of TWD 3.3 billion and offset by other changes of TWD 3.9 billion. Page 35 on VNB movement. The decline in VNB was driven by sales volume change of TWD 1.9 billion and offset by product mix change of TWD 3.6 billion, and investment yield and other assumption changes of TWD 0.8 billion. Next section is the ESG highlights for your reference. That concludes the presentation.
All right. Good afternoon, everybody. This is Ya-Ling speaking. I would like to brief you the outlook guidance for 2022. For loan growth, we remained the same guidance as that time. Loan growth will have double-digit growth, both on NTD loans and foreign currency loans. As for NIM, we revised NIM's outlook guidance to 1.53%-1.55% under the assumption of U.S. rate hike as 175 basis points and Taiwan's rate hike at 62.5 basis points. The reason we revised up the NIM's guidance is that the product mix of loan in first quarter has changed and the spread, loan yield and the cost of deposit has widened by three basis points. We add this three basis points to our original guidance to 1.53%-1.55%.
For fee income, we revised our outlook guidance for wealth management fee to mid-single digit growth, because the Ukraine war has lasted longer than expected. The U.S. rate hike are faster and higher than expected. Plus, the Taiwan government has changed the policy from zero COVID to live with COVID. All the reasons have impact our momentum of wealth management fee in second quarter. That's why we revised WM fee to mid-single digit growth. However, we revised up our guidance for credit card fee, because we believe after the recent surge of positive cases in Taiwan, the relief of COVID prevention measures will stimulate domestic consumptions and also overseas traveling. That's why we expect the spending will grow dramatically in second half of the year.
We revised credit card fee growth to double-digit growth. All in all, total fee growth will be mid to high single digit. Mid to high single digit growth for total fee income. For credit cost, we remain the same guidance at around 20 to 22 basis points. 20 to 22 basis points. For cost income ratio, we still remain at the same guidance, at 57%. 57%. For the outlook guidance for life, we remained most of our guidance. For recurring yield, recurring yield is at 3.27%, and cost of liability at 3.13%. 3.13%. Hedging cost at 58 basis points. 58 basis points. That's all I have to brief you about the outlook guidance. Now we open for Q&A section.
Yes. Thank you, Ms. Chiu. Ladies and gentlemen, we will now begin our question and answer session. If you wish to ask the question, please press zero one on your telephone keypad and you will enter the queue. After you are announced, please ask your question. Should you wish to cancel your question, you may press zero two. Thank you. Please press zero one to ask the question. Thank you. If you would like to ask the question, please press zero one on your telephone keypad. Thank you. Ladies and gentlemen, we are now in question and answer session. Please press zero one on your telephone keypad if you would like to ask the question. Thank you. Our first question is coming from Gurpreet Sahi of Goldman Sachs Hong Kong. Go ahead, please.
Thanks for taking my question. It is regarding margins. Net interest margin, we get the guidance for this year. Can you tell us the impact of higher interest rates into 2023? In other words, if interest rates are raised by the central banks as you expect for this year, then kept at that level, how much of a positive impact because loans can be repriced into next year also?
You are right. The rate hike only reflect partial in this year. For next year, our estimation, the NIM, will be 1.64% for 2023. 1.64%. It fully reflect the rate hikes this year.
Thank you very much. Regarding growth in general, I see that the double-digit loan growth guidance, part of it is because of the LH Financial Group consolidation. Question is more basic. Underlying in the economy, do you see any sign of slowing down, especially in the real estate side, the demand for mortgage, et cetera?
Except for LH consolidation, the momentum of the loan growth was still good. If we compare the first quarter loan balance to the loan balance at the year-end of 2022, the growth was 3% for both NTD loans and foreign currency loans, except for LH. One quarter, 3%, then the full year is very possible to be a double-digit growth. Plus, for the Southeast Asia, the economic outlook is better than the rest of the world. We believe, we still have a good estimation and expectation for our loan growth for the whole year.
Okay. Thank you. Finally, regarding the life insurance business, can I ask a very basic question? Why can the hedging cost be negative for this quarter? Is there any one-off gain from something? On a sustainable basis, where is hedging cost running at?
The positive hedging cost is due to the US dollar depreciation.
I think the positive hedging, I call it hedging revenue, is because weaker NT dollar. For the sustainable basis, it's like I just mentioned that we expect the whole year hedging cost will be 58 basis points. That is cost, not revenue. 58 basis points of cost. Because we don't expect NT dollar will continue to depreciate for the rest of the year, plus swap cost and the NDF cost is increasing now.
Okay, understood. Thank you very much.
Thank you. Next question is coming from Jemmy Huang of JP Morgan. Go ahead, please.
Hi. Just two questions from me on the life insurance side. I think on the EV investment return assumption, if I look at the Taiwan dollar and US dollar, I think the US dollar, you actually revised down the starting point. Just trying to figure out, for the blended investment return upgrade, is my understanding correct that it's actually better on the Taiwan dollar side and on the US dollar side, you didn't really have much positive impact as a result? The second question is for your life investment portfolio, just trying to understand whether you have any investment into the China property-related sector, the high-yield bonds in that kind of Are there any potential risks on this bond, if any? Thanks.
For EV calculation, for 2020, the equivalent rate for NT dollar was 3.66%. For 2021, it's 3.81%. For U.S. policy, the equivalent rate was 4.49% for 2020, and 4.59% for 2021.
Got it. Thanks. Regarding the investment portfolio related to China property sector, if any?
Yeah, Jemmy, just give us a second. We are checking on the information.
Sure, thanks.
According to my information, we don't have mainland real estate portfolio. You mean bond portfolio or real estate?
Bond investment in the property sector in China.
No, we can check it for you and provide the information to you after the meeting.
Sure. Thank you.
Thank you. The next question is coming from Alex Ye, UBS. Go ahead, please.
A few questions from me. Number one is on the Japan outlook. I remember in your previous briefing, you mentioned you expect some loan recovery on Japan, and you probably expect low single-digit growth. Now in Q1, we are seeing a -4% quarter-over-quarter decline. I'm wondering, any change in your outlook for the Japan loan growth? How about your expectation about the monetary policy outlook for Japan?
Excuse me, Alex. Just hold on a moment. Thank you.
Guess you can hear me now. The second question is on consolidation of LH Group. It has helped to improve your NIM, but it also led to a higher credit cost, right? I'm wondering, what is the net impact? Does it contribute to a higher ROA to the group, to the bank overall? My last question is about your dividend policy on the life side. Last year was a good year in terms of capital gains from equity. I'm wondering, what does it take in order for, say, Taiwan Life to continue to pay out policy in future? Assuming your operating results turn out to be the same as what you are planning, is it possible for Taiwan Life to claim your payout dividend in future? Also a bit on your bank capital adequacy ratio.
Are you comfortable with your current CET1 and CAR ratio? Thanks.
For Japan, we expect the loan growth in Japan just very mild, maybe low single digit. Because of the market and the GDP growth expectation is not as strong as other countries. For LH, the spread or the NIM for LH stand alone is about 2%. The NIM is better than that in Taiwan. For the higher provision is because the relief program for COVID implemented in last year by the government. Right now, LH is still communicating with Bank of Thailand about the methodology to estimate the provision for the relief program. It's not because the underlying loan is high risk. It's because the one time impact because of COVID. For the dividend policy on life side, we already got the approval from Insurance Bureau that we can upstream about TWD 3.7 to the holding company.
Sorry, TWD 3.7 billion to the holding company. About the CAR ratio or BIS ratio on the bank side. For this year, it's still quite strong, although there's new rules implemented starting from this year. For CET1 ratio on bank side is 11.6% for the first quarter. We believe the capital adequacy ratio is quite strong.
Okay. Thank you very much.
Thank you. If you would like to ask the question, please press zero one on your telephone keypad. Thank you. We are now in question and answer session. Please press zero one on your telephone keypad if you would like to ask the question. Thank you. There appears to be no further questions at this point. We thank you for all your questions. That would be the end of the conference. We thank you for your participation in CTBC Financial Holding Company's conference call. One moment. We're going to take the question from Eric. The next question is coming from Eric Shi, KGI Securities. Go ahead, please.
Okay. Hi, this is Eric Shi from KGI. Can you give me more detail about the anti-pandemic policy, such as how many you sold and how many the client already applied the claims, then the total amount of the claim? Can you give more how much potential right issue amount for the P&C? Thank you.
COVID policy, we received 400,000 policies. Until now, around 130,000 cases were on the right hand. The total premiums, TWD 8 million. As of May 13th, 2,773 claim cases, the total claim amount, TWD 52.4 million. We calculate many scenarios for the COVID policies. Due to the pandemic policy change quite often and the impact is very large, we have not confirmed numbers to tell you. According to our calculation, we use the worst scenario to calculate the impact for life, because the P&C is 100% subsidiary for life. The impact for life is around single digit. It is a single-digit percentage for life RBC.
Okay. Thank you.
I also would like to get back to Jemmy's question about the Taiwan Life's exposure to the real estate-
Yeah.
Sector in China. For Taiwan Life, currently they have invested in the bond. Their bond investment has an exposure of around TWD 8.8 billion in China. They are all rated at investment grade, and the payment are all making on schedule. They don't have exposure to Evergrande at all. The asset quality still remain check. Thank you.
Okay. Thank you. There appears to be no further questions at this point. We thank you very much for all your questions, and that will be the end of the conference. Ladies and gentlemen, we thank you for your participation in CTBC Financial Holding Company's conference call. You may now disconnect. Goodbye.